LSREF2 Clover Property 4, LLC v. Festival Retail Fund 1, LP
3 Cal. App. 5th 1067
| Cal. Ct. App. | 2016Background
- Festival Retail Fund 1, LP (Festival Fund) formed SPEs to buy retail property; it caused Festival Retail Fund 1 357 N. Beverly Drive, LP (Festival 357) and FRF1 (its wholly owned LLC) to be formed and Festival 357 to take title. Festival Fund was a limited partner and FRF1 the general partner.
- Festival 357 borrowed $25,025,000 from Anglo Irish Bank (later assigned) to buy the Beverly Hills property; Festival Fund executed a guaranty capping liability at $1.5 million and expressly waived antideficiency protections under Civil Code §2856.
- The loan secured by a deed of trust later went into default; after a nonjudicial foreclosure Clover (assignee) purchased the property and sued Festival Fund for breach of the guaranty after Festival Fund did not pay.
- At bench trial the court found Festival Fund was the true principal obligor (via a single-business-enterprise/alter-ego theory) and ruled the guaranty was a sham, invoking antideficiency protections; judgment was entered for Festival Fund.
- The Court of Appeal reversed, holding substantial evidence did not support that Festival Fund was the principal obligor or that the lender structured the transaction to evade antideficiency law; Festival Fund itself created the SPE structure and limited its liability by doing so.
Issues
| Issue | Plaintiff's Argument (Clover) | Defendant's Argument (Festival Fund) | Held |
|---|---|---|---|
| Whether the guaranty is a sham so antideficiency protections apply | Guaranty valid; lender may enforce against guarantor despite foreclosure | Guaranty is a sham because Festival Fund was the true principal obligor and lender effectively looked to it | Reversed: guaranty not a sham; insufficient evidence Festival Fund was principal obligor |
| Whether lender structured transaction to evade antideficiency laws | Lender did not structure; borrower entities were created by Festival Fund | Lender’s requirements (guaranty, review of org docs, financials) show it treated Festival Fund as primary obligor | Court: lender did not design entity structure; requiring guaranty/financials is not dispositive |
| Whether single business enterprise / alter ego made Festival Fund liable as de facto general partner | No alter ego; corporate separateness respected | FRF1 and Festival Fund were one enterprise (FRF1 lacked assets, employees, formalities) making Festival Fund primary obligor | Reversed: alter-ego/single-enterprise not established as to lender’s knowledge or to defeat equities |
| Standard of review and sufficiency of evidence | N/A | N/A | Appellate court applied substantial-evidence review (with implied findings) and concluded documentary record did not support trial court’s legal conclusions |
Key Cases Cited
- CADC/RADC Venture 2011-1 LLC v. Bradley, 235 Cal.App.4th 775 (Cal. Ct. App.) (sham-guaranty analysis; adequate legal separation defeats sham defense)
- California Bank & Trust v. Lawlor, 222 Cal.App.4th 625 (Cal. Ct. App.) (focus on whether lender structured transaction to circumvent antideficiency laws)
- River Bank America v. Diller, 38 Cal.App.4th 1400 (Cal. Ct. App.) (lender-driven entity creation can support sham-guaranty defense)
- Cadle Co. II v. Harvey, 83 Cal.App.4th 927 (Cal. Ct. App.) (guarantor treated as principal obligor may be protected from deficiency)